As the continuing emergence of new technology enlarges the
boundaries of the entertainment industry, the ownership of
musical compositions has become more and more valuable not
only to the major conglomerates but also to any company creating
programming for the general public.
Hit songs and film and television scores earn increasingly
large amounts of money from their use on CDs and cassettes;
in audiovisual projects such as motion pictures, television
series, DVD, video cassettes, and laser discs; royalty bearing
downloads; subscription services; and in an unlimited number
of other entertainment-related distribution vehicles--print,
karaoke, interactive media, Broadway, off-Broadway, regional
theater, computer games, video jukeboxes, commercials, music
boxes, lyric reprints in novels and nonfiction books, and
so on.

The Purchase Price
When songs are being sold, the actual purchase price of the
acquisition is almost always based on a multiple of the average
annual net earnings of the selling company over the most recent
three to five fiscal or calendar years. For example, if an
acquisition occurs in 2002, it would normally be based on
a multiple of the net income from the compositions for either
the period 1999-2001 or 1997-2001. In many respects,
taking the five year basis is safer for the buyer, since the
longer the period considered, the less likely it is for an
isolated event (such as from a one time chart record, audit
recovery, litigation settlement, or major commercial use)
to have a disproportionate effect on the overall net income.
A three year period can be acceptable, however, if the buyer
is able to discount such income fluctuations.
Occasionally, a buyer may also be offered the possibility
of acquiring all or a portion of the publishing rights to
a catalog with a very limited or no earnings history (as in
the case of a new recording artist/songwriter with a current
album in the Top 10 and a #1 single). Instead of using past
earnings as a guideline, the buyer will have to predict future
earnings on the chart activity and also project earnings on
future not-yet-released albums and singles--a somewhat tricky
proposition, even with experience.

Calculation of Net Income
The "net income" of a catalog (which is the basis
of the purchase price computations) is virtually always defined
as gross royalty income received by the selling company less
all royalties payable to songwriters and other third parties.
The most reliable method that gives a true reflection of
the worth of a publishing catalog, is the accrual basis of
net income computation. Under this method, the buyer takes
the gross earnings received during a year and deducts the
income actually paid to songwriters and other third-party
royalty participants during that year, plus royalties that
will be paid out in the future from that income. For example,
publishers normally pay songwriters their royalties for income
received between January 1 and June 30 of each year within
45 to 90 days after June 30 (from August 15 to September 30).
Royalties payable to the songwriters on income received during
the July 1 through December 31 period, however, would be paid
out between February 15 and March 31 of the next year. The
accrual basis, by taking into account the gross income received
less the royalties actually paid or due to be paid on that
income, will always give a more realistic view of what a catalog
is actually worth during a particular year.

Purchase Price Multiples
Once an average annual net income figure is calculated, the
buyer and seller will negotiate a multiple to be placed on
such earnings to arrive at a final purchase price. In recent
years, multiples have been in the 6-18 range, but can
be higher or lower depending on a number of factors, including
the nature of the rights being acquired, the remaining copyright
life of the compositions being purchased, the costs of borrowing
the money related to the acquisition, the loss of income from
other investment areas in which the purchase price could have
been used, the need of the seller to dispose of its publishing
assets, the value of owning musical compositions to other
divisions of the buyer, whether the buyer has a network of
wholly owned or affiliated publishing companies around the
world into which the catalog can be integrated, the existence
of new technologies that may enhance the use of the catalog,
whether the catalog represents a broad range of musical compositions
or has a concentration in only one type of music, whether
there are other bidders, and the anticipated ability of the
buyer to promote the catalog in new areas effectively, along
with the additional monies derived from such promotion.